joe noel what happened to this????????????????
Why JN Invested $1.1 Million in Medical Alarm Concepts, Inc. (MDHI) -A Pink Sheet Company for Goodness Sake - Am I Crazy?
A risky endeavor, but if you do the homework it is easy to see the opportunity
I have always been a sucker for entrepreneurs and small struggling businesses and I have helped financed more of these operations than I care to admit. Medical Alarm Concepts Holding, Inc., which trades under the symbol MDHI, is one of these ventures. I can safely say it had been one of the most difficult, but I can also say it may turn out to be on of my most successful deals.
Over the past five years it has become increasingly difficult to survive as a small public company. Regulations have tightened to the extent it is virtually impossible to raise equity capital. Real small cap investors are becoming few and far between, which has led to significantly reduced liquidity for those few individuals who are still willing to finance these risky ventures. The vast majority of stock broker-dealers have moved out of the small stock business and the Deposit Trust Company (DTC) is making the equity trading and liquidity situation even more difficult with its very aggressive stance relative to "Chilling" many small cap stocks.
The cost of simply being public continues to rise - auditors are ever more cautious, which means they charge more and take much longer to produce financials, corporate attorneys are charging higher rates because of the increasing amount of time required to ensure compliance, and ongoing reporting requirements are resulting in increased spending on accounting functions. The advent of the Internet stock message board - individuals who seemingly have little else to do all day except to post lies and misrepresentations about small companies - have made it significantly more difficult for small companies to gain the credibility they need with suppliers, distributors, financiers, and potential board members.
It's easy for me to say, I've never seen the situation more difficult for the small public company.
So, Why? - My friends, family, investors, and business partners ask, would I continue to invest in small, risky companies, such as Medical Alarm Concepts Holdings, Inc.
The answer is that there are good opportunities within the small cap space simply because of the current difficulties in the overall environment - fewer players have caused valuations to fall enabling investors who do their homework to buy into good prospective investment at very reasonable prices.
One situation I have uncovered relative to such opportunities is a company called Medical Alarm Concepts Holding, Inc., which is a small, but growing, medical alarm company based in King of Prussia, Pennsylvania. The company competes in the medical alarm space - think… The space that was created by the company that gave us the iconic television commercial, "I've fallen and can't get up." Medical Alarm Concepts is a small player with in this market, but I believe they are now starting to take market share due mainly to their superior technological solution. Over the past two years, I, and my partners at Biotech Development Group, LLC, have invested over $1.1 million in this small company.
We believe there is a strong opportunity here that is just beginning to be realized.
Below, I have outlined why we taken a calculated risk in backing this company:
A Solid Chance at Real Profitability and This is Already Being Realized
Medical Alarm Concepts operates on very low overhead and is not a capital intensive operation. Because of extensive use of outsourcing, the monthly fixed costs are only approximately $50,000, which will allows the Company to be operational cashflow positive rather low revenue levels. According to Company management, operational cash flow positive status was reached several months ago. Because of the recurring revenue model, I believe this operational cash flow status is sustainable into future periods. Those of you who are active small-cap investors will likely agree that very few small-cap companies actually ever turn a profit. This Company is well past this stage and I expect profits to continue to grow on a monthly basis. These facts make Medical Alarm Concepts unique within the marketplace - a small public company that actually makes money - What A Concept!
Soon to be Fully Reporting
In recent filings with the Securities & Exchange Commission, the Company has been very clear it plans to soon become fully reporting. Last month, the Company announced it had completed audits for 2011 and 2012. A few weeks later, the Company filed its 10K for year ending 2011. The Company has further indicated additional filings will be made soon. I do not believe the Company would have spent all of that money on the accountants and auditors if it really did not intend to become fully reporting. The process of becoming fully reporting after being dormant relative to filing with the Commission takes a considerable amount of both time and money. I believe the Company is well into this process and will soon be filing all of its back 10Qs and 10Ks in order to regain fully reporting status. I believe the Company is going through this painful process for one simple reason - that reason is simply it is required to file the past financials, before it will be able to file future quarterly financials, that will demonstrate the strong revenue growth trajectory and the growing positive cash flow generated from operations. I suspect investors will welcome such news.
As a result of becoming fully reporting, which I believe will occur very soon, I expect MDHI to be upgraded of the Pink Sheets to the OTCQB. This will clearly be a welcome event.
Rapidly Improving Balance Sheet
The Company has already made significant strides in cleaning up its balance sheet and more changes are likely coming very soon according to statement made publically by the CEO. Medical Alarm has been very successful in negotiating balance sheet related concessions. Biotech Development Group has already forgiven significant portions of the money loaned to the Company and has cancelled tens of millions of "in the money" warrants to purchase common stock. In August of 2012, 61 million warrants were canceled, during February 2013 even more warrants were canceled, and finally on May 28, 2013 all remaining warrants to buy common stock were canceled by Biotech Development Group. In April of 2013, Biotech canceled $236,397 of revolving credit line debt owed by Medical Alarm Concepts. All Series B Preferred Shares owned by Biotech have also been cancelled. We agreed to the cancelations in order to support the Company and to assist in the acceleration of balance sheet debt reductions.
These cancellations, have had not only a significant impact on debt levels, but will also significantly reduce the amount derivative liabilities carried as debts on the balance sheet. As of the last 10K filed with the SEC, which was for the Fiscal Year ending June 2011, the Company carried $323,000 of such derivative liabilities. While the Company's accountants and auditors have not yet announced the treatment of these debt cancellations, we believe it is very likely that most, if not all, of these derivative liabilities will be reversed as one time income statement gains, which will result in rather large reported earnings. We think this will really please the Company's investors. Regardless of the treatment, is very clear that the debt and warrant cancellations that have occurred have already had a very significant positive impact on the balance sheet, which will be reflected in SEC filings the Company has promised to file.
DTC Chill Lifted
As I stated above, the small-cap marketplace has become increasingly difficult. One of the most significant issues facing small companies are the special restrictions that can be placed on the company's securities by the Depository Trust Company (DTC). These restrictions, often called "DTC Chills". DTC is owned by the major financial trading companies, including the New York Stock Exchange and NASDAQ, and functions as a clearinghouse to electronically settle trades between member organizations. If the DTC has some cause for concern about a specific security it may place a "chill" status on the shares, which severely limits brokerages' ability to electronically transfer shares back and forth. In reality, receiving a "DTC Chill" makes it almost impossible for small companies to raise money and to attract investors. Because DTC is owned by the large financial companies, they feel no responsibility to inform the companies that received the "chill" the reason why such a draconian restriction is placed on the security. This lack of information significantly further adds to the already extremely difficult process for the company to appeal the "Chill" and to have it removed.
Approximately one year ago, such a "chill" was imposed on the trading of Medical Alarm Concepts, which reduced trading liquidity and made it virtually impossible to attract new investors to the Company. For the past year, the Company's corporate counsel has worked diligently to appeal to DTC for "chill" removal, which resulted in literally thousands of pages of documentation being produced to the DTC and its attorneys. After hundreds of hours of work by Company personal and corporate counsel, last week DTC announced the "chill" had been lifted and that electronic trading would once again be immediately accepted.
Some of you who are intimately involved in the small-cap market place may have an appreciation of the significance of actually getting a DTC "chill" removed. Because of the extensive documentation and the research performed by the DTC attorneys, removal is somewhat of an endorsement of a company's financial veracity. With such a considerable amount of money on the line, it gives me great comfort that the attorneys at the DTC found nothing in the thousands of pages of documentation that would allow them to continue to impose the "chill". Those of us who are closely involved with the small-cap market and these issues realize that the DTC would clearly prefer not to remove the "chill" and only does so when it has absolutely no evidence that there was any reason for the "chill" being imposed in the first place. I think it is highly significant for the Company to have survived such a "scrubbing" by the DTC with no issues being found.
The removal of the DTC, in my opinion, will likely be realized in improved trading liquidity and recovered corporate credibility.
I think the removal of the "chill" is a big deal.
Recurring Revenue Model
While the Company does sell its MediPendant product on a wholesale basis, the vast majority of revenues are derived from ongoing medical alarm monitoring subscriptions. The customer purchases the MediPendant from the Company and signs up for monthly monitoring services. Each month the customer is billed for services, which generates recurring revenues. I believe investors place a premium valuation on companies with recurring revenue simply because the revenue stream is much more reliable than are revenue streams produced by companies who must start over each quarter with zero sales. I believe this increases both the revenue and earnings multiples that MDHI will be able to carry in the future.
The Best Technology Within the Medical Alarm Marketplace
It is a little-known fact that a gentleman named Nevin Jenkins invented the first medical alarm over 40 years ago. While Mr. Jenkins failed to patent his idea, which subsequently has generated well over $1 billion in sales, he has still been involved in the medical alarm marketplace ever since. It is also a little known fact the inventor of the MediPendant is Nevin Jenkins, who has sold the patent to the Company. In my conversations with Nevin he makes it very clear he believes the MediPendant is the best technology available on the marketplace. He comments it is the most reliable, the most robust platform, and the only fully monitored product on the market that allows the user to both speak and listen directly through the pendant.
Approximately 99% of all of the medical alarms on the market today are based on his original invention, which requires the user, in the event of emergency, to speak and listen through a centralized base station. With the MediPendant, the user simply speaks and listens directly into the pendant. In addition to having this speak and listen technology advantage, the MediPendant is also a very robust platform, with a long battery life and an extremely durable casing. It is easy to feel the quality of the MediPendant when you hold in your hand. I believe it is clearly a step above the other less well-made products on the market today.
Patent Defense
Before investing in Medical Alarm Concepts, I performed a very thorough analysis of the Company's intellectual property. The Company has a very firm patent on Medical Alarms that utilize voice prompts for two-way voice communications through the pendant. I believe this intellectual property has significant value that is likely comparable, or superior, to the value of the future revenue streams. A successful defense of the Company's intellectual property, in my opinion, would yield significant returns for the Company's investors.
Product Introductions
The major disadvantage of the MediPendant will soon be fixed, in my opinion. While the MediPendant has a strong technological advantage, where the user can simply speak and listen for the pendant, the big disadvantage is the product's size. The designers purposely engineered the device around the speaker system. We must remember this product is used by elderly and infirm individuals. The loud volume of the speaker is critical and the MediPendant excels relative to this requirement. Unfortunately, along with the very robust speaker comes a larger device compared to the competition. I believe this is one of the biggest limiting factors for sales of the MediPendant. Investors in Medical Alarm Concepts should not be concerned, however, as I believe a change is in the works. One of the major aspects of the strategic investment acquired in February from Chinese-based JTT-EMS, I believe, is the assistance JTT will provide in reengineering the unit. As the Company has indicated, its contact with JTT originated from the factory operation that manufactures the MediPendant. We are hoping, and we believe we will soon receive, a reengineered MediPendant that will be approximately 1/2 to 1/3 the size of the original product. We believe such a product is a game changer in the medical alarm space. Sales are already growing robustly at the Company, but an option of a smaller unit that still has a long battery life and a robust speaker, we believe, significantly positively changes the competitive situation.
Obamacare
In our opinion, Obamacare changes the insurance provider equation for medical alarms. Generally speaking, Medicare does not provide reimbursement for medical alarms. Some states through the Medicaid program have begun paying for medical alarms, but reimbursement is still the exception rather than the rule. This changes considerably as Obamacare is implemented across the country. The Company has already signed with Coventry Insurance, one of the largest insurance carriers in the United States. Coventry is currently in process of bidding the MediPendant for several state reimbursement projects. The awarding of even one state to Coventry and the MediPendant will change the revenue dynamic of the Company very positively. I anxiously await news relative to this area, as I believe it is a true game changer.
International
We are a bit disappointed with the way international sales have developed. We nevertheless, see strong possibilities relative to this area. The Company has publicly announced deals in Denmark, Ireland, and China, which in the future could yield additional revenue growth. We think the lack of revenue progress in the international arena is not related to the robustness of the product - in fact it is relatively easy to program the MediPendant to speak almost any language - but rather we believe it is simply a management focus issue. Company staff is limited and we believe the management has wisely focused on fixing the Company's infrastructure and financial situation, while continuing to move its Internet and retail programs forward. I hope we see progress on the International front very soon, but for now I am rather satisfied with the domestic progress.
Costco Distribution
The Costco Wholesale distribution deal is a godsend for the Company for several reasons.
First, it goes without saying that Costco is one of the most powerful retailers in the United States and Canada. The Company announced a very successful series of promotions with Costco over the last twelve months and we would not be at all surprised to see such promotions continue, or to accelerate, in the future. The MediPendant product on the Costco site can be viewed here.
But aside from simply the marketing muscle Costco provides, there is also an additional important reason why the Costco distribution arrangement is so advantageous for Medical Alarm Concepts. Companies that compete in the medical alarm space can easily eat up a lot of cash. Typically, the customer does not want to pay for the device upfront and is also resistant to paying for subscriptions in advance. This has led to the vast majority of customers wanting to acquire the device with no upfront out of pocket cash and no ongoing monthly commitment.
In order to satisfy such customer demand, companies within the medical alarm space must fund the working capital required to produce the unit and acquire the customer and then fund the required monthly monitoring services until it can break even on these expenses by billing the customer monthly fees. This creates a situation where companies within the medical alarm space usually do not break even on customer accounts until the customer is 4 to 6 months into the contract. When this occurs, it eats up a lot of precious working capital and these days working capital is very difficult to obtain.
Medical Alarm Concepts does not have this situation relative to sales that take place via Costco. The Costco customer pays $139 to acquire the MediPendant unit and six months of monitoring. Because this is a reduced price when evaluated on a monthly cost basis, customers our willing to purchase this deal from Costco. While the Company has not released the exact amount of money it makes as gross margin relative to Costco transactions, we do know the Company is cash flow positive upon payment being received from Costco. This situation has allowed Medical Alarm Concepts to significantly limit the amount of working capital required to grow its business. While the initial cash flow positive situation relative to Costco sales is a big bonus for the Company, there is an additional bonus the Costco relationship produces. After the Costco customers' six months of prepaid service expires, Company personnel are able to contact the customer in order to extend the contract. When the contract is extended, 100% of ongoing monthly revenues flow directly back to the Company. This is a huge benefit and provides a strong strategic advantage relative to its competitors.
The Bottom Line
The bottom line for Biotech Development Group relative to Medical Alarm Concepts is that we believe strong additional value will be realized as the situation at the Company continues to develop. Just two years ago this Company was virtually bankrupt. Since that time it has realized a stunning turnaround that has led to growing revenue streams, operational cash flow profitability and a significantly improve the balance sheet. With the product redesigns we are expecting, continued growth in Internet marketing, further expansion of the Costco sales program and we hope a large deal from Coventry Insurance, we see it high likely that revenue growth will continue to accelerate.
We also really like the recurring revenue model at this Company as it produces consistent, strong gross margins that we expect to grow every single month as more and more customers realize the benefits of the Company's superior technology. When we factor in the Company likely soon achieving fully reporting status, the removal of the DTC Chill, and the consistently improving balance sheet, we think this Company is a winner for investors.
Over the next 12 months we expect this company to continue to show strong progress. At the end of the 12-month period, we believe Medical Alarm Concepts will be fully reporting, virtually debt-free, and will be producing consistently reliable courtly profits. This is something that fewer than 1% of pink sheet ever companies achieve. We believe this Company will soon join this select group former pink sheet companies that make it into strong profitability.
Simply put: risky for sure, but for us we see this Company as the rare small cap success story. That is why we have invested over $1.1 million in this operation.
Congratulations to management for their perseverance in doing the almost impossible and further congratulations to all the many long-term investors in Medical Alarm Concepts who did their homework in order to determine the facts relative to this quickly developing company.
I encourage all investors interesting in Medical Alarm Concepts to pick up the phone and call the CEO, Ronnie Adams.
Doing your homework does pay off!
Disclosures:
Joseph Noel, Biotech Development Group, LLC and its partners, hold a significant position in the debt and equity of Medical Alarm Concepts Holdings, Inc.
Disclosure: I am long MDHI.PK.
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